Michael Busler / Simple can be better -- tax all income at 12 percent - pressofAtlanticCity.com: Commentary

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Michael Busler / Simple can be better -- tax all income at 12 percent

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Posted: Monday, December 3, 2012 12:01 am

Michael Busler / Simple can be better -- tax all income at 12 percent

As we attempt to solve the fiscal-cliff problem, most agree that we need to increase tax revenue. But that needs to be done in such a way that it is not harmful to economic growth. Is that possible?

It may be possible, but not by simply tweaking a few tax rates. What is necessary may be a complete overhaul of the federal income tax code to make it more equitable, more efficient and easier to administer, while increasing tax revenue.

The current code is viewed as not equitable or fair since Mitt Romney and Warren Buffett pay a lower tax rate than their secretaries, and many large, multi-billion-dollar corporations pay no income tax at all because they relocate their headquarters outside of the United States.

The current code is not efficient since tax loopholes reduce tax payments as long as the income is earned or spent in a government-favored market. The current code is extremely difficult to administer since the 300 million words in it are never fully read or understood by anyone. And the current code does not raise enough revenue to come close to balancing the budget. Is there a better idea?

Here is a solution that addresses all four concerns: Replace the current complicated and counterproductive tax code with a single 12 percent tax on all income above a livable minimum (say the poverty level), with absolutely no deductions for anything.

All income would be taxed at the same rate, no matter how it is earned or how it is spent. All income from wages and salaries, rent, interest, dividends or capital gains would be taxed at the 12 percent rate. Corporations would pay the 12 percent rate on all income.

This proposal satisfies all the criteria. It is fair and equitable. Every income earner pays exactly the same rate on all income earned above a livable minimum. Wealthy people will pay more tax dollars - but proportionately the same as everyone else. So Romney and Buffett would pay the same rate as their secretaries.

For some reason, many people believe that higher-income earners should not only pay more tax dollars but should pay a higher rate than others. This does not seem equitable. If the wealthy pay the same percentage, they will pay more dollars as their income increases. But they will pay proportionately more, not disproportionately more. That seems fairer to me.

This proposal is very efficient since it does not favor or discourage any method of earning income or any method of spending that income. No distortions are created in any market. So a person who chooses to rent a home is treated exactly the same as a person who chooses to own a home with a mortgage, thereby not distorting housing prices. (Some economists believe that the current home-mortgage deduction contributed to distorting housing markets and to the resulting financial crisis.)

This proposal is extremely easy to administer. An individual simply adds up all of her income from all sources. Then the livable minimum is subtracted. The balance is then multiplied by 12 percent, and that's the tax liability. It is a one-page form.

This proposal will raise more revenue. Last year, the personal federal income tax raised about $1.1 trillion in revenue. This proposal would raise more than $1.3 trillion. In addition, this proposal will add to economic growth. A number of studies have been done examining the relationship between tax rates and economic growth. These studies have concluded that lowering the tax rate and switching from a progressive tax to a single tax rate would add significantly to growth in gross domestic product. That means more people would be hired so that the unemployment rate would fall and there would be more people paying taxes. This, too, would lead to increases in tax revenue.

Some will argue that this proposal is really a tax cut for the wealthy. But it really isn't, since the wealthy pay about this rate anyway, because most of their income is taxed at the currently low rate for dividends and capital gains. The wealthy would be encouraged to invest more (since all marginal income is taxed at only 12 percent), and they would likely earn more taxable dollars, contributing to more tax revenue for the government.

While this may seem like a simple solution to a complex problem, sometimes simple is better.

Michael Busler is an associate professor of finance at The Richard Stockton College of New Jersey.

Posted in on Monday, December 3, 2012 12:01 am.

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